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TimePosted 14/07/2014 09:51:26

LH Merger update: speed is of the essence

Lafarge and Holcim have finally released further details of their proposed merger, some two months after the initial announcement.

On 7 July, the companies identified shared assets, including 23 plants in eight countries amounting to a total of 27.5Mta, that will be sold to allow the merger to go ahead. These disposals have been selected to anticipate the requirements of each country’s respective competition authority and facilitate rapid progress of the merger, which has a deadline for completion by 1H15.

To date, competition authorities in 15 countries are expected to look at the deal, while Joaquin Almunia, Europe’s competition commissioner, has already said that the merger would be subject to an in-depth review, making the 1H15 deal closure date appear a significant challenge.

Assets under the hammer will include Holcim’s operations in France (5.4Mta), Hungary (distribution only), Serbia (1.4Mta), Canada (3.3Mta), Mauritius (distribution only) and certain assets in Brazil, amounting to around 10.5Mta capacity.

Lafarge will divest the Mannersdorf plant in Austria (1.3Mta), Germany (3.4Mta), Romania (4.9Mta), the UK (3.6Mta), certain assets in the Philippines and Brazil, plus Réunion (distribution only), amounting to approximately 17Mta in total.

Analysts at Jefferies remain positive on the deal: "The geographic fit between the two businesses is excellent in our view. We estimate that the required divestments could raise EUR7.3bn, assuming an average EV/EBITDA ratio of 9.5 times," they argue.

"We expect the synergies to exceed the initial guidance by more than 20 per cent, once they include the benefits of concentrating production on the lower cost locations, particularly in Europe. There is also the potential for stronger pricing. However, the recent history with both companies cost-saving programmes suggests that a significant proportion of the synergy benefits may be passed on to customers through lower prices."

Complex deal
The deal is highly complex, with difficult decisions being made on which assets to sell, how to sell them and to whom.

The UK operations will provide a particular headache, where the assets currently held within the Lafarge Tarmac JV will be sold. To achieve this, LafargeTarmac must first divest one cement plant to satisfy existing demands of the UK competition authorities, after which Lafarge must then buy out the 50 per cent share belonging to Anglo American for GBP855m. Only then will the business be ready for disposal. Lafarge may possibly hold on to one plant.

In Germany, where Holcim’s market share has been boosted by its recently-approved asset swap with Cemex, it appears that no risks will be taken and all of Lafarge’s plants will be sold, even if overlap is limited.

Other countries where no update has been provided in spite of competition concerns include the USA, Morocco and India. In the US, Holcim could escape by simply closing its Mason City, Iowa, plant (already mothballed), while in India the combined LafargeHolcim entity will overtake UltraTech as the market leader and this could be enough to prompt scrutiny from the Competition Commision. In Morocco, where Lafarge and Holcim are first- and second-largest producers, respectively, it is possible that Lafarge will seek to sell its 50 per cent in the JV (with the royal family) to a new entrant – although it is noted that this will not be required by competition law.

Further detail on these three countries is expected in due course, while it is also noted that in Spain, Holcim will separately seek to divest the 25 per cent shareholding of its merged Spanish business with Cemex.

It is understood that in each country, the entire operation, including senior management, will be part of any deal. Questions remain around related subsidiaries such as Holcim’s Geocycle waste units in France and Germany.

In terms of the deal transaction, Lafarge has mandated BNP Paribas and Morgan Stanley, while Holcim has nominated Credit Suisse and HSBC.

Potential buyers
Holcim Chief Executive Bernard Fontana has said that the companies had received around 50 expressions of interest from potential buyers.

Certainly, a range of cement producers will be interested in acquiring individual assets to strengthen their own portfolios. These will include CRH (Ireland), which has a long and successful track record of acquisitions and may try to use this deal to transform itself into a fully-fledged global player, although at several billion euros, the price tag for the complete portfolio would be a stretch.

HeidelbergCement
is reportedly interested in acquiring both the US and French assets, describing the opportunity as a ‘once-in-a-generation opportunity', though a combination of strategic and competition concerns could deter LafargeHolcim from considering the German major.

Filaret Galchev, Eurocement’s owner with a 10 per cent stake in Holcim, will also be taking a keen interest in the disposals, which would make a good fit for the Russian market leader's portfolio and offer it a swift way to accelerate expansion across Europe.

Speed is of the essence
Based on current indications, however, the preferred scenario of LafargeHolcim is likely to be a block sale of the entire portfolio to a single new entrant, thereby simplifying the sales process and eliminating any time-consuming antitrust issues to make the deal closure deadline of 1H15  a reality. Private equity firms such as KKR & Co and CVC Capital Partners Ltd are reported to be considering bids, and are perhaps best placed to raise funds on the scale required.

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